Standing Committee B

[Mr. John McWilliam in the Chair]

Finance Bill

(Except Clauses 1, 4, 5, 9, 14, 22, 42, 56, 57, 124, 130 to 135, 138, 139, 148 and 184 and Schedules 5, 6, 19 and 25, and any new Clauses and Schedules tabled by Friday 9th May 2003 relating to excise duty on spirits or RÿD tax credits for oil exploration.) - Schedule 22 - Employee securities and options

John McWilliam: Order. It is rather warm, so those hon. Members who have not already removed their jackets may do so. Ladies, as always, need not ask.

Howard Flight: I beg to move amendment No. 107, in
schedule 22, page 252, leave out lines 42 to 44.

John McWilliam: With this it will be convenient to discuss the following:
 Amendment No. 108, in 
schedule 22, page 253, line 35, leave out 'or pretended purpose'.
 Amendment No. 105, in 
schedule 22, page 253, line 47, at end insert— 
 '(ca) a partnership interest in a venture capital investment partnership as defined in paragraph 2 of Schedule 7AD of the Taxation of Chargeable Gains Act 1992 or in a partnership which is itself a partner in such a partnership'.
 Amendment No. 24, in 
schedule 22, page 254, leave out lines 5 to 8.
 Amendment No. 106, in 
schedule 22, page 254, line 13, after 'them', insert 
 'or an interest in a partnership which holds securities,'.

Howard Flight: Welcome to the Chair, Mr. McWilliam.
 On the Floor of the House, I broadly expressed our criticism of the provisions in schedule 22, particularly their complexity, their potential for unintended consequences and the element of overkill. I shall draw attention to some of the comments made by the Institute of Chartered Accountants in that context because they should be considered with the amendments and as a point of principle. 
 The institute welcomes the repeal of the dependent subsidiary charge and, up to a point, the acceptance that it is not right for the charges on conditional interests and removal of restrictions to catch the whole post-acquisition appreciation in value. However, it wants to register a strong protest against the relevant clause and schedule. It understands the Government's need to prevent avoidance, but is disappointed that the legislation, other than the provisions on approved schemes, has been fundamentally redrafted without prior consultation or notification. It is unhappy about the great complexity of the new provisions, which take up 72 pages, and suggests that the amendments were not drafted by the rewrite team because it would not 
 have done so in this way. Many of the amendments are incomprehensible—for example, new section 428—and the institute points out that its members will question the commitment of time and resources to the redrafting project. The result is that the case for continuing its involvement in the rewrite is undermined. 
 The institute believes that as the new provisions were not subject to prior consultation it is vital that the explanatory notes provide assistance, but they barely scratched the surface of the more complicated provisions. It said that warrants are treated as securities but options are excluded and there is a muddle between the two. The commencement rule for the new provisions on convertibles seems to give rise to a double charge on shares issued at less than market value. The institute believes that the reference to payments for group relief in the relevant new sections should include a reference to the analagous payment for transfer under section 179 of the Taxation of Chargeable Gains Act 1992 liability. It finds it difficult to follow the interaction between new sections 428 and 446E and questions the justification for the latter. It also questions the justification for imposing a charge every 5 April for six years by reference to the same depreciatory transaction, which it believes will happen if the transaction has a lasting effect on the value of the shares. It feels that section 446L imposes a charge on non-commercial increases of value on each 5 April when nothing else happens and the employer receives no benefit. It also feels that new section 446L(7)(b) has the effect that non-commercial increases are taxed with no set-off for non-commercial reductions. Finally, it points to the typographical error, which the Government have already acknowledged, where ''2002'' should read ''2003'' in new section 446F(2)(b). 
 The amendments all deal with four key areas. The first is employment-related securities. New chapters 2 to 4 of the Income Tax (Earnings and Pensions) Act 2003 appear to catch many situations where one would not normally expect the shares to be employment-related securities. For example, if an entrepreneur sets up a company, subscribes for shares and becomes a director, it seems that the shares would be caught as shares made available by the company that became his employer. If the definition is not changed, we would welcome guidance on the application of the legislation there. 
 Secondly, there are problems with the restricted securities territory. The definition of restricted securities is wide and appears to include provisions placed in a company's articles of association. Many companies that operate share schemes contain bad-leaver provisions in their articles, which require shares to be sold at less than market rates when an employee leaves employment in defined circumstances. It must be remembered that the usual purpose of providing employees with equity is to motivate them to perform. If an employee leaves the company, the other shareholders will not want them to continue to benefit from the company's performance. 
 New section 424 (b) gives a limited exception from the restricted securities chapter where an employee is required to sell his securities at less than market value 
 if his employment ceases due to misconduct, but a bad leaver is normally defined as a leaver who does not leave of his own choice or owing to death, redundancy or retirement. If the intention is to provide companies with the scope to contain bad leaver conditions in their articles of association, the exception in 424 (b) should be widened. It is not clear whether shares with different rights from ordinary shares also fall within these provisions. We assume that they do not, but clarification is needed. 
 Thirdly, there are issues surrounding the timing of elections. The proposed elections in new sections 430 and 431 in chapter 2 are welcome as they provide employees with the opportunity to disapply, but 14 days is a short time scale for an election given that employees must consider whether it would be beneficial. As it is a joint election, employer and employee have to agree. Is 14 days sufficient in principle? I shall come anon to timing for the immediate future. 
 Finally, new sections 430 and 431 require that elections be made ''in a form approved'' by the Revenue. I believe that such forms are not available, but chapter 2 applies to securities acquired on or after 16 April and more than 14 days have already elapsed since then. I think that the Government have dealt with that issue in one of the amendments, but it raises the whole question of the time limit. 
 A wider point is that we appreciate that most of schedule 22 is billed as anti-avoidance. It will make unapproved option schemes a nightmare, which will demotivate companies from using them. That, together with the problems with which we dealt this morning, implies that the Government are really anti option schemes, other than EMI—enterprise management incentive—options. The Chancellor is frequently on record as wanting the UK to learn from the United States in the world of entrepreneurial success. If we end up with a highly complex fiscal nightwear regime on options, which can be extremely important for medium-sized companies, that will take us in the other direction.

John McWilliam: I was following the hon. Gentleman quite closely and I was with him totally until he came to an expression that I could not recognise. Could he please explain what fiscal nightwear is?

Howard Flight: Fiscal nightmare.

Dawn Primarolo: Perhaps the hon. Gentleman did not hear the hon. Member for Eddisbury (Mr. O'Brien), who suggested that fiscal nightwear was the Committee without a jacket.

Howard Flight: You add some humour to a dry subject, Mr. McWilliam, for which I thank you.
 On the first group of amendments, which includes amendments Nos. 107 and 108, the objective is to make it clear that warrants are not to be treated as securities for the purposes of chapters 2 to 4, which are the provisions dealing with restricted shares, convertible securities, securities with artificially depressed values, securities disposed of for more 
 than market value, and post-acquisition benefits from securities. Although warrants are not the same as options, there is good reason for distinguishing them. The point illustrates the need for clearer drafting. 
 I move on to amendment No. 108 and the definition of securities being expanded to include rights under contracts for differences or contracts similar to contracts for differences, which ensures that the provisions relating to shares are not avoided by other types of interest or securities providing similar benefits, but having different characteristics. The definition of contracts similar to contracts for differences appears to go too far in referring to a ''pretended purpose.'' Amendment No. 108 corrects that drafting error. 
 Amendments Nos. 105 and 106 go together. They relate to an important area. They ensure that venture capital partnerships are outside the scope of the Bill. We hope that the Paymaster General will make a statement saying that the terms of the joint Inland Revenue and British Venture Capital Association letter will continue to apply, or else state what practice will. The amendments are designed to exclude interests in a limited partnership from the definition of units in a collective investment scheme. 
 On amendment No. 24, it is inappropriate for the Treasury to have the right to rewrite fundamentally the basis of tax legislation by order, which is what the relevant provision allows. 
 To summarise, the important territory is venture capital. I cannot believe that the Government intend to catch it in all the complexities, nightmares and traps of the schedule.

David Laws: It is worth picking up on one of the points that the hon. Gentleman made about the comments of the Institute of Chartered Accountants on the schedule. It is regrettable that, after all the efforts that have been put in in respect of the tax rewrite project, the institute should feel it necessary to be so critical of the schedule and even to raise the possibility that its complexity might put in doubt the institute's commitment to the project. I simply look for a commitment from the Paymaster General, not only to consider the way the project is going hand in hand with the new measures under the Bill, but to tell us whether she shares some of the concerns that have been expressed.

John Baron: I, too, want to express some concern about the schedule in relation to the tax law rewrite project, but first, I wish to point out that parts of the schedule are welcome, particularly the changes to the amount of tax payable when shares are converted or are no longer subject to a risk of forfeiture and so on.
 However, I share with the hon. Member for Yeovil (Mr. Laws) and my hon. Friend the Member for Arundel and South Downs (Mr. Flight) the concern that schedule 22 was introduced with hardly any warning and with inadequate explanation in the Budget day press release. More than 70 pages of 
 legislation will completely rewrite rules that have been developed over some 10 to 15 years, and it is a shame that extensive tranches of the newly rewritten legislation that had been drafted in the tax law rewrite style, which we fully support, in the Income Tax (Earnings and Pensions) Act 2003 that came into effect on 6 April is to be replaced with this Bill's bland drafting, most of which is not in the new style, which may cause problems. Will the Paymaster General confirm what action she will take to put that right, if she can? 
 Amendment No. 105 is a particularly important amendment because it asks whether venture capital partnership funds are outside the scope of the Bill. If the amendment does not find some favour with the Government, I would reinforce the point made by my hon. Friend that some ministerial statement should be made to clarify whether the terms of the joint Inland Revenue-BVCA letter will continue to apply. I look forward to hearing the Paymaster General's comments.

George Osborne: I have a specific interest, in that a family business, for which I do not work, is involved in a management buy-out. I believe that the schedule will have an impact on management buy-outs.
 In general, before speaking to the amendments, I wish to say that I share the concern expressed by all Opposition Members—Conservatives and Liberal Democrats—at the sheer complexity of the provisions. The Paymaster General should take serious note of the concerns that have been expressed by organisations such as the Institute of Chartered Accountants and the Law Society. Frankly, when they say that something is totally unintelligible and very hard to follow, one really must sit up and pay attention. They deal with documents that are unintelligible and hard to follow, so they must know what they are talking about. If tax law is difficult even for qualified accountants to follow, let alone lay members of the community—ordinary people—one has to question whether it is bad law. 
 My second point was also raised by my hon. Friend the Member for Arundel and South Downs. The House has just gone through an entire rewrite project. I remember the admirable speech by my hon. Friend the Member for Eddisbury on the tax rewrite provisions. I believe that he went on for more than an hour, explaining to the House of Commons exactly why the project was important. It is striking that only 10 days after the Income Tax (Earnings and Pensions) Act 2003 came into force we had in the Budget and now in the Finance Bill a huge rewrite of the rewrite. As various professional organisations have pointed out, the Bill does not use the same language, it is inconsistent and it seems to defeat many of the objectives of the rewrite. The various people and organisations that spent so much time on that process rightly ask whether it was worth all the effort when, less than a fortnight later, the Government introduced all sorts of changes that undermined the whole purpose of the exercise. 
 The third concern that I would flag up is the lack of consultation. The changes are substantial and 
 important. As the Institute of Chartered Accountants points out, there was no prior consultation. Surely such important and complex matters should have been discussed with the tax accounting industry if no one else. It was not evident from the press releases issued on the day of the Budget that the Government were envisaging such far-reaching changes. 
 The amendments under discussion, which were tabled by my hon. Friend the Member for Arundel and South Downs, and those we will debate later this afternoon attempt to tackle some of those problems. The Government have already tabled 17 amendments to the schedule, which tells us what a rushed job it has been. It is poorly drafted, it increases the complexity of tax law and it is contrary to what the whole rewrite was supposed to achieve. The Paymaster General owes us an explanation.

Dawn Primarolo: A large number of the arguments put forward so far have been general points about the entire schedule rather than specific to the amendments. Perhaps I could spend a few minutes responding to those, without trying your patience, Mr. McWilliam, and then move as quickly as possible to the amendments.
 Schedule 22 provides a coherent, consistent and fair way forward for all of those involved in share schemes. There is tax value when it is unlocked and accessible by reason of employment. There are major avoidance schemes that need to be blocked and we are happy to give details of them, but hon. Members can see those advertised on the internet. The rules must ensure that there is fairness throughout the system. Some people may have been paying too much tax. There is a risk that others might pay too little by identifying weaknesses in the wording. The wording must be coherent and consistent and we must ensure that as many errors are removed as possible. 
 Hon. Members continued to advance the argument that there was no consultation. There was considerable discussion for some time with those involved in this highly complex area of tax. In those discussions, avoidance issues were flagged up by some representatives who disapproved, and other areas where the rules should be rewritten and eased were mentioned. We will come to that in the discussion of the amendments. Some people were being taxed too much, frankly. 
Mr. Osborne rose—
Mr. Baron rose—

Dawn Primarolo: I will give way to the hon. Member for Billericay (Mr. Baron). The hon. Member for Tatton (Mr. Osborne) can keep his seat until I have dealt with tax law rewrite.

John Baron: On consultation, while I accept what the Paymaster General said, many professional bodies in London and the country as a whole are unaware of the consultation on schedule 22, which she claims has taken place. I do not doubt her word, but I ask her to bear that in mind. Consultation on the Income Tax (Earnings and Pensions) Bill extended for some two to three years. The consultation period for schedule 23 started at about Christmas time, but many are saying
 that there has been hardly any consultation on schedule 22. If the Paymaster General has had discussions, could she inform the Committee with whom she has had them?

Dawn Primarolo: Indeed. The repeal of the dependent subsidiary regime, for example, which it would not be an overstatement to say was universally hated, was introduced by a joint working party with full consultation on the basis that it did not work. I do not want to mislead the hon. Gentleman by saying that a draft of schedule 22 was sent out for consultation. The lengthy consultation concerned the inconsistencies and problems between and within the schemes and the schemes' interactions with the capital gains regime. In a moment, we will come to venture capital, which is important. During those discussions, numerous points were made about how practitioners would like to see the schemes improved.
 The changes to the three-year period in schedule 21 were removed by Government amendment No. 166. The consultation produced the argument, which was apparently universally accepted, that we should make that change, but disagreements emerged on the detail. The hon. Member for Billericay is right to ask how I can guarantee that we consult with everybody—I cannot, of course, guarantee that and we have to do our best.

John Baron: I take the Paymaster General's point. Having said that—I hope that she will excuse my pressing this point—there is a general perception that very little consultation has taken place. For example, the Institute of Chartered Accountants has stated that much of the tax legislation in this area
''has been fundamentally redrafted with . . . no prior consultation or publicity''.
 I apologise for pressing the point, but it is important: over what period of time has she consulted and with whom? The general feeling is that there has been little consultation.

Dawn Primarolo: The discussion on how the schemes work has gone on for a considerable time. I cannot answer the hon. Gentleman's question now, but I understand the question and am happy to examine the matter further to provide him with examples.
 I say to the hon. Members for Tatton and for Billericay that Mr. David Cohen of Norton Rose, who is chairman of the share scheme lawyers group—it is not unreasonable to presume that he knows what he is talking about—wrote a two-page article in The Tax Journal succinctly setting out the changes. The article discussed why the changes were being made, the reasoning behind them, whether the industry felt that they were good, whether it was indifferent to them or whether it felt that they did not go far enough. 
 We can discuss whose opinion is the most relevant all afternoon. I have already conceded to the hon. Member for Billericay that, while we do everything that we can to ensure that those who should be involved are, we inevitably rely on organisations. That might be unreasonable given that organisations have a 
 great deal else to do, but the argument revolves around the definition of ''consultation''. If consultation meant consulting every single person in addition to the representative bodies, we could not move ahead. It is widely accepted that since 1997 the Government have made enormous strides on how and when we consult. The fundamental point about the schedule is that the complexities of avoidance are dealt with by the interaction between the various chapters of the legislation. As I said in the Committee of the whole House, it would have been extremely foolhardy to publish a road map of avoidance before consultation. 
 On the tax law rewrite, the new legislation is built on the strong foundations of clear English enshrined in the Income Tax (Earnings and Pensions) Act 2003, which was produced by the tax law rewrite team and enacted earlier this year. The user-friendly structure and phrases have been taken directly from that work and are used in the new legislation. As I said, the subject matter is highly complex and the drafting complexities inevitably reflect that. I am happy to put on record not only the Government's commitment to the tax law rewrite, but my personal commitment to it as a Minister. The right hon. Member for Fylde (Mr. Jack) knows about that commitment because he is one of the people who spent a huge amount of time to such great effect on the rewrite.

George Osborne: That is not what the professional organisations involved in the rewrite say. The Chartered Institute of Taxation states:
''We now appear to have a position which we had always feared, namely that after spending so much time and effort in rewriting the UK tax code, the rules become overlaid with poorly drafted and incomprehensible new legislation.''
 That is pretty strong stuff. Can the Paymaster General explain why the CIOT feels like that?

Dawn Primarolo: Perhaps the CIOT would also explain to members of the Committee how the Government should address large-scale avoidance involving £1.4 billion of remuneration in one year. That money passed through artificial equity remuneration schemes. How could we conduct a public consultation on that?
 The CIOT is an active, but mostly friendly, critic of the Government in challenging how we proceed with our legislation. I do not know why it thinks that. In the end, we are the elected Members. I am a Minister and have to examine the information before me. I take advice from my expert officials and I—not the CIOT—have to take a decision to protect the public purse, which I have done.

John McWilliam: Order. We are debating a group of amendments, not the activities of the CIOT. We are dealing with a group of technical amendments to a complex schedule. I am taking a relaxed view of the debate because of the breadth of the group of amendments and of the schedule. May I ask Members to come a little bit closer to order?

George Osborne: The amendments are necessary because of the poor drafting of the schedule. The Paymaster General has dismissed the CIOT, but the tax law committee of the Law Society states that
''the amendments themselves although superficially following the style of the rewrite are not consistent in the language of rewritten statutes and in many places are extremely hard to follow''.
 That is the view not of one organisation but of the whole tax industry, and the right hon. Lady must respond to it.

Dawn Primarolo: I disagree. I rest my argument on the two pages written by Mr. David Cohen, which I will circulate to every member of the Committee, so that they may have the benefit of his clear and incisive understanding of exactly what we are seeking to do.

George Osborne: Arise, Lord Cohen.

Dawn Primarolo: I think that you will deeply regret that comment when you speak to the gentleman concerned.

John McWilliam: Order. When the Paymaster General uses the word ''you'', she refers to me, and I did not actually say anything.

Dawn Primarolo: I apologise, Mr. McWilliam. I was referring to the hon. Member for Tatton, who made that comment about Mr. Cohen from a sedentary position. If he would like to put that on the record, Mr. Cohen might like to respond to it. That article was in The Tax Journal, that well-known paper avidly read by all Committee members.
 I shall explain why I shall be asking my hon. Friends to resist all the amendments if they are pressed to a vote, and I shall respond specifically to the points made by the hon. Member for Arundel and South Downs on venture capital. I urge the Committee to resist the amendments because they either seek to narrow the definition of security for the purposes of schedule 22 or restrict our ability to define security in a way that responds to taxpayer concerns or protects the Exchequer efficiently. 
 As I have explained, the Exchequer is exposed to loss by tax avoidance schemes using assets such as options over gilts because the existing definition of share is too narrow. A definition is needed that will cover a wide range of financial and legal products or arrangements. I believe that the proposal in amendment No. 107 to exclude warrants stems from representations that, because warrants at their most basic are a simple type of right to acquire a share or option, their inclusion in the list of securities is unnecessary. As rights to acquire shares or options, warrants are dealt with in the provision relating to gains arising from options. However, including a wider term in the list of securities will prevent the possibility of more complex and exotic forms of warrant being developed and used to perpetuate the avoidance of tax and NICs. I have examples of that, should the Committee wish to hear them. Again, I got them from the internet, where they are being marketed as means of avoiding tax and NICs. 
 The proposal in amendment No. 108 to remove the words ''or pretended purpose'' from the definition of a contract similar to a contract for differences would narrow the scope of that term, which is taken straight from the definition used in the Financial Services and Markets Act 2000. The generally accepted meaning of a contract for differences is an arrangement to profit or to avoid loss by reference to movements in the value 
 of a commodity, instrument or index. Where such profits are employment related, they should be subject to income tax and national insurance. The wording ''or pretended purpose'' is intended to embrace contracts that are similar in nature to contracts for differences where the intention of the parties is not reflected in the written terms of the contracts. 
 It has been suggested in representations—I think from the CIOT—that the inclusion of those words goes ''too far'', but no explanation of what is meant by ''too far'' is provided. The inference is that the wording would catch things that should not be caught—in other words, that are not employment-related income on which tax and national insurance should be paid. But inference is not a basis on which to open the door to possible avoidance. If something similar to a contract for differences were to be given to an employee by reason of employment, it is difficult to see any good reason for excluding the value acquired by the employee from normal tax and national insurance treatment. 
 Amendments Nos. 105 and 106 deal with partnerships. Amendment No. 105 seeks to remove interest in venture capital investment partnerships from the list of securities, and amendment No. 106 seeks to remove an interest in partnerships from that list. In some circumstances, an interest in a limited partnership will fall within the definition of a collected investment scheme, and an employee given such an interest may thus be acquiring an employment-related security. It would be unusual for a partnership interest to be acquired by reason of employment, but it does happen where an employee in a venture capital scheme is allowed to acquire an interest in a limited partnership set up as an investment vehicle. 
 A point to emphasis here is that the rules introduced by schedule 22 seek to tax value obtained by reason of employment. If the person pays full, unrestricted market value for the security, no tax or national insurance would arise, despite the fact that the security may fall within the definitions of schedule 22. That is because the amount paid for the security is always taken into consideration when calculating tax charges. 
 On venture capital, I am sure that hon. Members appreciate that the venture capital arrangements have adopted new and complex forms in recent years. It is necessary to understand those in order properly to consider the tax consequences. The current agreement with the British Venture Capital Association, in so far as it relates to share scheme issues, sets out the consequences of the current rules governing shares subject to restrictions and conditions for employees in companies backed by venture capital. The current rules will remain in force until shortly after Royal Assent. 
 As I said in the Committee of the whole House, we will discuss the impact of the new rules on venture capital with the BVCA, and do so with the utmost speed. I understand that Inland Revenue officials have already written to the BVCA inviting it to discussions. Adopting the amendment without fully exploring all the issues with that association would be premature and could lead to an unsatisfactory outcome for all 
 concerned. Although I oppose amendments Nos. 105 and 106, I would not rule out a future Treasury order, through the powers conferred in new section 420(6), if I were satisfied that such a course of action were appropriate to deal with these issues. 
 On all the amendments, should hard evidence emerge in future that income is being caught that should not be, it will be simple to amend the list of securities through Treasury order. I say that that will be simple; that is as long as amendment No. 24 is rejected. That amendment seeks to remove the very power to amend the list of securities by Treasury order that would help in those circumstances. 
 I have explained to the Committee how I intend to proceed, in particular over venture capital. The discussions that I mentioned are important and need to be held with some urgency. As I have explained, should it emerge from them that steps need to be taken I intend to use the Treasury order procedure to do that as quickly as possible.

John McWilliam: Order. Before the Paymaster General sits down, may I ask her and other hon. Members to spell out any acronym that they wish to use before they use it? It gives the people writing Hansard the chance to know what is being said.

John Baron: I should be grateful if the Paymaster General would clarify one point. If I may return briefly to amendment No. 107, the definition of securities includes warrants according to new section 420(1)(c)—we know that a warrant is a sort of option—and new section 420(5)(e) excludes options from being securities. As new section 420(1) is subject to new section 420(5), there seems to be no point in new section 420(1)(c). I do not expect an explanation now, but I would appreciate clarification from the Paymaster General.

Dawn Primarolo: That is not the advice that has been given to me, and I congratulate the hon. Gentleman on managing to connect all those provisions. It goes to show that when one applies oneself, it is not quite as difficult as some may think.
 Perhaps the issue should be considered the other way round, although the hon. Gentleman got the chain right. Section 421 gives a list of financial instruments that are included in the list of securities. That list is then qualified by new section 420(5)(e) which provides that if the instrument that would otherwise be a security is a right to acquire another security the instrument is excluded. That ensures that the receipt of an option is not covered by chapters 2 to 4 because it is specifically covered in chapter 5.

Howard Flight: I thank the Minister for her response. One purpose of amendment No. 107 is to ensure that the definitions do not include options within the scope of the charge because warrants and options are different, as the Financial Services and Markets Act 2000 makes clear. There is some confusion in this territory, and it may be of benefit to the Inland
 Revenue and the Law Society to ensure that they have a common understanding.
 I welcome the Paymaster General's comments on the venture capital industry. Does she envisage that discussions to review the joint letter are likely to be well under way when we come to Report? It is important with such a major change of legislation that the full effects are understood. I understand the logic of her opposing amendment No. 24, but it is unsatisfactory if the Government can rewrite the law on a whim. There is an important point of principle where those two points interrelate. 
 To revert to the second part of the venture capital amendment, No. 106, can the Minister clarify the meaning of ''employment-related'' in British venture capital? A statement of interpretation would clear up the other aspects of concern raised in this area. 
 Before sitting down, I cannot resist commenting that two eminent lawyers involved in the share scheme lawyers group have raised complaints with me, and I quoted one on the Floor of the House. One may have appeared in print, but that should be not taken as evidence that the others were unsatisfactory. 
 To conclude, we would like further clarification on the venture capital aspect, and if that clarification is not satisfactory, we shall press amendment No. 105 to a vote.

Dawn Primarolo: On the question of meetings with the British Venture Capital Association, I cannot give an absolute undertaking on whether enough progress will have been made by Report, but I hope to be in a position to provide further information about the issues and how we intend to proceed, if not the conclusions of those discussions. I appreciate that this is a matter of concern. I know that early dates have been offered to the association, and it is a matter of whether those dates are convenient for the individuals. I hope that the hon. Gentleman understands that we are doing our best to conclude the matter as quickly as possible for the sake of certainty, and I hope to be able to give further information on Report.

Howard Flight: The latter statement is particularly important. On the basis that there will be scope to address the issue again if the outcome is not satisfactory, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Dawn Primarolo: I beg to move amendment No. 167, in
schedule 22, page 255, line 2, leave out 
 'a beneficial interest is acquired' 
 and insert 
 'the person acquiring the securities or interest becomes beneficially entitled to those securities or that interest'.

John McWilliam: With this it will be convenient to discuss Government amendments Nos. 168, 169, 177, 178, 180, 182 and 183.

Dawn Primarolo: On the advice of parliamentary counsel, the amendments make the same alteration at the relevant points. Schedule 22 contains a number of references to a person acquiring or being entitled to a
 beneficial interest in employment-related securities. The term was used in the original part 7 of the Income Tax (Earnings and Pensions) Act 2003 in accordance with the source legislation and was carried over in the tax law rewrite to schedule 22 to ensure continuity of language and understanding. However, schedule 22 includes a definition of an interest in a security being an interest of less than full beneficial ownership. I have been advised that the conjunction of those two legal phrases may, inadvertently, lead to uncertainty about the meaning of the phrase ''beneficial interest''. The amendments were tabled on the advice of parliamentary counsel to put the matter beyond doubt.

John Baron: Does the Paymaster General agree that much of the drafting of the Bill has been hurried and that a large tranche of it is not written in the new style, which is unfortunate?

Dawn Primarolo: I concede that, without a shadow of doubt, the legislation is extremely complex, and it was complex before the changes in schedule 22. As I said earlier, wherever possible, we carried forward the style, phraseology and layout from the tax law rewrite, but, unfortunately, the world does not stand still, planning mechanisms move on, new complexities emerge, and tax law must reflect that and achieve consistency. That is what we seek to do in the schedule.
 Amendment agreed to.

Howard Flight: I beg to move amendment No. 110, in
schedule 22, page 255, line 8, leave out 
 ', or by a person connected with a person's employer,'.

John McWilliam: With this it will be convenient to discuss the following:
 Amendment No. 109, in 
schedule 22, page 256, line 13, leave out from first 'connected' to end of line 14.
 Amendment No. 111, in 
schedule 22, page 257, leave out lines 6 to 15.
 Amendment No. 112, in 
schedule 22, page 257, line 17, after '3', insert ', 3A, 3B'.
 Amendment No. 113, in 
schedule 22, page 257, line 22, leave out '3A to' and insert '3C and'.
 Amendment No. 25, in 
schedule 22, page 257, line 40, at end insert 
 'Participation by an employee or prospective employee in an offer to the public where that offer or ancillary arrangements contain provisions relating to employment or the ability to dispose of securities acquired through the offer shall not of themselves mean that any securities so acquired are not acquired under the terms of an offer to the public.'.

Howard Flight: Amendment No. 110 is designed to prevent a new provision deeming a right or opportunity to acquire securities to be available by reason of employment from having too wide an ambit. In the legislation dealing with benefits in kind, provision of benefits by an employer to an employee is deemed to be by reason of employment. Such provision has not been introduced into the legislation dealing with share-related income. Therefore, it is a new departure.
 shown that a person has acquired an interest in shares as a director or employee, pursuant to a right conferred on him or an opportunity offered to him by reason of his office or employment. It is now proposed to insert a provision that gives a right or opportunity to be available by reason of employment, if made available by a person's employer. If the shares available by reason of this opportunity are acquired, the new provisions apply. 
 The ambit could be extremely wide. For example, if A, employed by a particular company, has shares in a different company in a private capacity and the first company takes over the second company, I understand that the new shares issued would fall within the ambit of the definition. 
 Indeed, if the provision extended to offers by connected persons, it would be extremely wide and could have unexpected results. For example, if a company is controlled by three shareholder directors who have entered into a shareholders' agreement for the purpose, the shareholders are likely to be connected with each other and the company. However, if one shareholder transferred shares to another pursuant to the shareholders' agreement, the transaction would be within the remit of schedule 22. The employing company may know nothing of the transaction or, even if it knew, it might not be able to prevent it. 
 If the Paymaster General will not accept the amendment, I hope that she will say something to confirm that such situations are not captured by schedule 22.

Rob Marris: On page 254, new section 421B(1), the penultimate line, which refers to the hon. Gentleman's first example of the company takeover, says that
''the right or opportunity to acquire the securities or interest is available by reason of an employment of that person''.
 Surely that means that, in the hon. Gentleman's company takeover example, that would not apply if the individual had shares in an individual capacity in another company that then took over his or her employing company. Therefore, the situation is covered.

Howard Flight: I thank the hon. Gentleman for his intervention. He is a good lawyer, and I hope that his interpretation of those words is correct. However, the point has been raised by the Law Society, which is not entirely happy that the new definition does not overrule that understanding and bring in the type of situation that I described. I am sure that if the hon. Gentleman were a member of the Government, his statement would be extremely welcome.

Rob Marris: As a member of the Law Society, I am happy with the wording.

Howard Flight: I am glad to hear that, but I trust that the hon. Gentleman has a broad enough mind to realise that some of his colleagues are not. Therefore, clarification would be a very good thing.

Stephen O'Brien: I have been caught by the excitement of that exchange. I wish to assure my hon. Friend that although the hon. Member for Wolverhampton, South-West (Rob Marris) may speak for himself and for like-minded members of the Law Society, he certainly does not speak for all members of the Law Society, because I am one, and I do not share his view on that point.

Howard Flight: Amendment No. 109 seeks to provide consistency with the rewrite of the income tax legislation, which led to the Income Tax (Pensions and Earnings) Act 2003. It was provided in section 168(3) that all provision made by an employer for members of his family or household was deemed to be by reason of employment. Household was defined to include dependants and guests. That definition of household remains in the 2003 Act, but is not used in relation to the share-related changes in the benefits provision. The reference to household seems to have crept back into the provision. That definition should surely not be perpetuated in the clauses. It is antiquated and somewhat uncertain in its scope.
 Amendment No. 111 would prevent additional securities acquired on or after 16 April 2003 in respect to securities acquired before that date from being within the new provisions, and would also prevent unforeseen results of the extended provisions in subsections (5) and (6), which deem increases or reductions in interests and security to be by reason of employment, and would give rise to charges under the new provisions. Under the existing income tax provisions that provide for share-related income, only the provisions applying to post-acquisition benefits and shares in chapter 4 contain provisions that treat additional securities acquired in a company reorganisation, for example, as being acquired in the same way as the original employment-related securities. 
 The effectiveness of the other share-related provisions could, therefore, be reduced by large bonus issues, for example, being made after employment-related securities had been issued. For example, if an employee were to receive 100 shares by reason of employment that fell within the conditional shares regime, the issue of a further 900 shares in a bonus issue to that employee would not fall within the regime. Such additional shares would be acquired qua shareholder, and not qua employee. 
 New section 421D makes a general provision applying to all the share-related income provisions whereby such additional shares are treated as acquired by reason of the same right or opportunity as the original shares. The provision is sensible and would remove anomalies in the existing rules. 
 We would like to see a ministerial statement on what new section 421D(5) is supposed to mean and how the Government intend to operate it. Where, for example, a beneficial interest grows over time and someone else's correspondingly withers, does the Inland Revenue propose to raise a tax charge on a 
 continuing basis? In the interests of time, I have resisted going through the extended comments of the Law Society on the matter, but there is a lack of clarity. 
 Amendment No. 112 would limit the application of chapters 3A and 3B to employees who are ordinarily resident in the UK, and would restore the status quo under the existing legislation. If anti-avoidance provisions are extended to all non-resident employees, any liabilities will fall on to the company in question and the Inland Revenue will be obliged to proceed against the employer. I assume that that is the intent, but I suspect it is a step too far in the area of anti-avoidance measures. Those are the objectives of amendments Nos. 112 and 113. 
 Amendment No. 25 deals with a practical point where a ministerial interpretation would be helpful. Employees may acquire shares in a public offer but still be required to enter into lock-in agreements not to dispose of the shares after admission to the market. It would clearly be undesirable to discourage employees from participating in such public offers, if there is a threat of adverse tax treatment.

John McWilliam: Order. As a humble engineer, I never expected to preside over what appears to be a sub-committee of the Law Society.

Dawn Primarolo: I am not a member of the Law Society. The earlier exchange proved my point with regard to agreement or disagreement on some of the schedule. However, let me go straight to the amendments and respond to the points made by the hon. Member for Arundel and South Downs.

Stephen O'Brien: I do not know how the Paymaster General expects lawyers to make a living if they all agree with each other.

Dawn Primarolo: I would like the hon. Gentleman to consider coming and sitting on the Government side, because what he is saying—even in jest—about disputes over words and interpretations and the difficulty that the Government face in drafting legislation to deal with all the eventualities applies very well to interpretations that lawyers may put on different things.
 Let us return to the amendments.

George Howarth: Will the Paymaster General give way?

Dawn Primarolo: Indeed. My hon. Friend is not a lawyer.

George Howarth: Exactly. I am a former engineer. Will my right hon. Friend the Paymaster General accept that in my experience there is no such thing as a humble engineer?

Dawn Primarolo: I will move on to the amendments, following the adage that when one is in a hole, one should stop digging.
 The effect of amendment No. 110 would be to introduce a very simple avoidance opportunity, which I am sure is not what those tabling the amendment envisaged. If the amendment were agreed, an employer could arrange for an affiliated company to make securities available to an employee. They would then be outside the charge to tax and national insurance. It 
 will not be surprising to hear that I am not in favour of that. I ask the Committee to reject the amendment. 
 Amendment No. 109 goes even further than amendment No. 110. Not only would it allow the avoidance that I have just described, but it would allow income tax and national insurance to be avoided simply by arranging for the securities to be received by a partner in a relationship with the employee that is not marriage.

George Osborne: I am sure that the Paymaster General is correct about the effect of the amendment. However, in tabling the amendment my hon. Friend the Member for Arundel and South Downs intended to draw attention to the use of the word ''household'', which was removed in the tax rewriting process from share-related charges in the benefit provisions. The phrase involving ''household'', which is antiquated and uncertain in scope, has crept back in. That is our general point about the rewrite.

Dawn Primarolo: The hon. Gentleman is not making any point at all, except that he might like to serve on the tax law rewrite committee when a vacancy next occurs. The purpose of responding to the amendments is to demonstrate how they would interact with the legislation and why the Government cannot accept them.
 Amendment No. 111 would remove a specific anti-avoidance provision. The legislation states, in effect, that if a small interest in securities is increased to a larger interest, the acquisition of the additional interest is employment related, so within the charge to income tax. That is designed to counter avoidance schemes, such as those known as ''geared growth'' schemes, in which, for example, an employee initially holds a 1 per cent. interest in the securities, but by the time that the securities are sold, has become entitled to 99 per cent. of the sale proceeds. Amendment No. 111 would allow that value, which is employment related, to escape the charge to income tax and national insurance. That is not right. I do not know how many times I will have to repeat the fact that if it is employment related, it is subject to tax and national insurance.

John Baron: Will the Paymaster General give way?

Dawn Primarolo: In a moment, if I may just finish this point.
 Amendments Nos. 112 and 113, if adopted, would take workers from overseas outside the scope of the new anti-avoidance rules in chapters 3A and 3B. I think that hon. Members will agree that there is no reason why people coming to work here from overseas should be treated differently from anyone else when it comes to applying new rules aimed at stopping tax and national insurance avoidance.

John Baron: I thank the Paymaster General for her generosity. I seek clarification on subsections (5) and (6) of new section 421D and the relationship between them. Perhaps it is me, and I am willing to admit that I am wrong, but I have read them twice now, trying to eke out some clarification on the interaction between them, but they seem to be gibberish. Where a beneficial interest grows over time, so correspondingly someone else's interest declines or withers, does the Inland
 Revenue propose to raise a tax charge every day, every month or every minute? That is what the interaction of those two subsections tends to suggest to me.

Dawn Primarolo: I just explained that point to the hon. Member for Arundel and South Downs, but perhaps I should have done so with reference to new section 421D(5). It is designed to counter schemes such as those known as ''geared growth''. I gave an example of such a scheme, where an employee initially held a 1 per cent. interest in a security but had a 99 per cent. interest in it by the time it was sold.
 Let us be quite clear about what the Government are trying to do here. The new rules target only non-commercial, artificial value manipulation, which often involves substantial cash bonuses. Schedule 22 deals with employment-related securities. Where shares are acquired as part of a public offer, the rules provide that they are not employment related. Amendment No. 25 is designed to take account of public offers where certain provisions are made and to ensure that in such cases the shares do not become employment related. However, provided that the employees in such circumstances pay the same price for the shares as other members of the public—so they are not receiving a preferential price because they are employees—the shares will be accepted as being within a public offer. There is, therefore, no need for the amendment. It is quite clear what happens in such circumstances. 
 The amendments are either unnecessary or, unfortunately, introduce loopholes that I am not persuaded should be included in the legislation. Should the amendments be pressed to a vote, I shall ask my hon. Friends to vote against them.

Howard Flight: I am glad that the Paymaster General was able to give the statement requested on amendment No. 25. With regard to amendments Nos. 112 and 113, there is perhaps a misunderstanding between us. She said that people who came from overseas to work here should be treated in exactly the same way as natives. There is no disagreement on that. My understanding of the schedule is that people who work overseas and are not resident at all in the UK could fall within its ambit. That was the Law Society's concern.

Dawn Primarolo: That could not be the case.

Howard Flight: It could.

Dawn Primarolo: The position is as I described it. I think that there is a misunderstanding here about a charge that might arise but will not. I am happy to respond to the hon. Gentleman and the Law Society in writing specifically on that point.

Howard Flight: I thank the Paymaster General. On amendments Nos. 110 and 112, she set out the tax avoidance that the schedule is designed to block and argued that the amendments would undo some of that blockage. The purpose of the amendments seemed to be entirely reasonable. I take the point about false situations, but what about genuine situations where a company may be taken over and it is not some contrivance to benefit from the scheme? It would be extremely unfair if someone got caught, as I set out in
 my explanation of amendment No. 111. There are similar points relating to amendment No. 110.
 Some issues relating to amendment No. 111 have nothing to do with avoidance schemes, but are genuinely fair non-avoidance situations that could get caught. I would ask the Paymaster General and the Inland Revenue to bottom both of those territories with the outside parties with whom they are holding discussions. The amendments were intended not to undermine anti-avoidance measures, but to protect the innocent.

Dawn Primarolo: I said in my closing remarks that the rules were targeted only at non-commercial, artificial value manipulation that often results in substantial cash bonuses, which are clearly outside what those schemes were supposed to allow. That is my understanding, but having said that, I always listen carefully to what the hon. Gentleman says. I will do so on this occasion, but what I have said to the Committee holds absolutely and the point that he has raised is a simple misunderstanding of what are complex rules and I will respond to him on that.

Howard Flight: It may be that I am misunderstanding, but I do understand the objective. The issue is whether the drafting catches a wider situation, and where the Law Society and others fear that it may. However, on the basis of the Paymaster General's assurances, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Howard Flight: I beg to move amendment No. 26, in
schedule 22, page 258, line 22, leave out 
 'as holders of the shares'.

John McWilliam: With this it will be convenient to discuss the following:
 Amendment No. 37, in 
schedule 22, page 267, line 23, leave out 
 'by virtue of holdings of shares of that class'.
 Amendment No. 44, in 
schedule 22, page 273, line 43, leave out 
 'by virtue of holdings of shares of that class'.
 Amendment No. 58, in 
schedule 22, page 289, line 16, leave out 
 'by virtue of holdings of shares of that class'.

Howard Flight: The section in question represents earlier legislation offering an exemption from anti-avoidance charges, but we fear that it may contain a flaw. There are two basic exemptions. The first is where employees hold ''proper'' shares—that is, the majority of shares affected by any transaction are held by investors who are not employees—and the assumption is that the transaction is bona fide commercial. The second basic exemption is for an employee-controlled company, where the assumption is that any nefarious transactions will only affect the employees themselves.
 The employer-controlled exemption bites only where the class of shares affected is the one that 
 gives employees control, which may not always be the case. For example, a company may have 100 A shares and 100 B shares, and all shares are held by employees, but because neither the A shares nor the B shares give control in themselves, a company 100 per cent. employee-owned could never have the benefit of the employee-control exemptions. The amendment would ensure that it would. 
 Amendment No. 37 makes the same point in relation to a different part of the schedule, as do amendments Nos. 44 and 58.

Dawn Primarolo: Amendments Nos. 26, 37, 44 and 58 all seek to extend the category of securities that are excluded from the rules for tax and employment related securities introduced by part 7 of schedule 22 of the Income Tax (Earnings and Pensions) Act 2003. Where employees control a company, a charge to income tax and national insurance is not appropriate in respect of the shares that provide control. The value that accrues to the holder of such shares is derived from the controlling interest in the company rather than from employment.
 For that reason, chapters 2, 3 and 4 do not create a tax charge where the shares that control the company are being adjusted—whether through the application of a restriction, a conversion right or some other condition—provided that these three conditions are met: first, employees hold the majority of the shares; secondly, employees can control the company; and thirdly, the shares concerned give the employees control of the company. The amendments would remove the third condition, which would make it easy in small, private companies controlled by director-shareholders to avoid tax and national insurance. The employee to be rewarded would acquire an ordinary share and then receive by reason of their employment the majority of a special class of shares. The value of those shares would be manipulated and the employee would receive what would be in reality a cash bonus without being taxed. If the amendment were adopted, the anti-avoidance legislation would be weakened and it would be possible to make arrangements to exploit the change. I, therefore, ask the Committee to reject the amendment.

John McWilliam: Order. Before I call the hon. Member for Arundel and South Downs, the hon. Member for Warrington, South (Helen Southworth) appears to be reading a newspaper, which is strictly forbidden.

Helen Southworth: May I apologise, Mr. McWilliam? I have received some figures on policing and apologise for examining them in Committee.

John McWilliam: I thank the hon. Lady.

Howard Flight: To some extent this is a probing amendment. The Government's drafting is designed to catch avoidance activities, but it could exclude an employee-controlled company from the employee-controlled exemption, which cannot be their objective. Although we do not want to put the amendment to a vote, it would be worthwhile for the Government to see whether their drafting can be
 improved in the interests of justice and in order not to exclude bona fide situations. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Howard Flight: I beg to move amendment No. 27, in
schedule 22, page 259, line 45, leave out 'given' and insert 'received'.

John McWilliam: With this it will be convenient to discuss the following:
 Amendment No. 28, in 
schedule 22, page 260, line 24, at end insert 
 'An event which qualifies under more than one of the paragraphs of subsection (3) below shall be a reportable event only in respect of the earliest paragraph by virtue of which it is a reportable event.'.
 Amendment No. 29, in 
schedule 22, page 261, line 19, at end insert— 
 '( ) Where a responsible person, or a person connected with a responsible person, agrees with the Inland Revenue to provide the information required by section 421J in respect of any employee or designated class of employees, then they shall be the sole responsible person for the purposes of this section in respect of that employee or designated class of employees.'.
 Amendment No. 30, in 
schedule 22, page 261, line 21, after 'question,', insert 
 'where the award or issue of the securities to an employee is made or arranged by or notified to that employer,'.
 Amendment No. 31, in 
schedule 22, page 261, line 22, after 'question,', insert 
 'where the cost of any award or issue of securities is borne by that host employer,'.

Howard Flight: Amendment No. 27 amends the provision on deadlines for reporting information to the Inland Revenue. Perhaps it is cheeky to say that the Inland Revenue has not had much luck in sending documents out to people on duly prescribed dates. It might be more sensible and prudent for the time to run from actual receipt rather than from theoretical date of dispatch.
 Amendment No. 28 is designed to avoid duplication. Under the old rules, the same event could theoretically be reported four times—twice each by two separate companies. 
 On amendment No. 29, as a matter of practice the Inland Revenue has always allowed a single group company to handle the reporting for all employers caught by the old reporting requirements. The new rules are much wider and the intention is to enforce them with greater vigour. It might be best to put current practice on to a statutory footing unless the Government intend to use non-reporting fines as a line of additional revenue. 
 Amendment No. 30 makes a practical point: local employers do not always know the incentives that have been awarded to their staff, particularly in the case of a company with a US parent corporation. Grants are often made in secret by head office without consulting the local subsidiary in order to protect employee confidentiality. Our amendment would clarify that the Government really want to report the details to the Revenue, including best knowledge about incentive awards. Otherwise, it may be unrealistic to pursue the 
 Revenue for information that it will not have. Amendment No. 31 makes the same point.

Dawn Primarolo: As the hon. Gentleman has just said, amendment No. 27 would change the start date of the period within which the Inland Revenue notice must be completed and returned to the date of receipt by the taxpayer rather than the date of issue of the notice. That is a common debate throughout the tax system. The amendment would only add confusion.
 An Inland Revenue notice is always dated and will specify the date by which it must be completed. If the date were to run from receipt of the notice, the Inland Revenue would need to know when the notice had been received to check whether the company had complied with its responsibilities, and that would not work in practice. I understand that the hon. Gentleman wishes to ensure that the date of receipt and return are as they should be but, as he knows, that happens elsewhere in the tax system and there are steps that can be taken. 
 The Inland Revenue is happy to give an assurance that it will not normally require completion of a return before 7 July following the year in question—the period available for the information to be provided without the issue of a return. A return would be required at an earlier date only if the Inland Revenue suspected significant avoidance or evasion. 
 Amendment No. 28 would result in insufficient information being provided. A transaction may fall into two or more categories. For example, securities may convert into other securities: that is both a conversion of the old security and an acquisition of the new. Both events need to be reported. The amendment would require only the initial acquisition to be reported and not the conversion. That would make the information difficult to interpret. Under the Bill, while the information would need to cover both events, only one return must be made containing all the information required. 
 Under the new reporting requirements each of four persons has a responsibility to provide information, as the hon. Gentleman said. They are the employer, the host employer in the UK, when the actual employer is overseas, the person providing the securities and the person issuing the securities. Amendment No. 29 would involve the Inland Revenue entering into an agreement with all four persons that only one of them would provide the information. The requirement on the others to provide information would then not be enforceable. 
 In practice, one of the four persons is likely to take on the responsibility. Once that person has provided the information, the others have no responsibility to do so, but if the Inland Revenue were to give up the opportunity to pursue one of the four relevant people to get the information, that would seriously inhibit the gathering of the information. 
 Amendment No. 30 would provide an excuse not to furnish information where a fellow group member had not provided a host employer with the necessary information. In practice, that could open the door to an employer avoiding his responsibilities. If a host employer is used, there is an obligation on the group to 
 keep it informed, so that it can comply with its obligations. Failure to do so should not provide a legislative excuse to avoid the information requirements. 
 Finally, amendment No. 31 would absolve a host employer from its responsibilities where the cost of issuing the securities is not borne by that company, thus preventing the return of information on the equity reward of many employees seconded to a UK subsidiary of an overseas parent. Without that information, the Revenue's compliance work would be significantly hampered, if not very difficult to achieve. 
 Schedule 22 substantially changes the legislation on equity remuneration. To ensure that the changes are properly implemented, it is essential that the information powers be improved. We do not think that the requirements are unduly burdensome, and the Inland Revenue will, of course, provide full guidance in due course to help companies comply with their responsibilities as easily and as efficiently as possible. 
 The combined effect of the amendments would make it much harder for the Inland Revenue to police the new legislation. That would not be acceptable to the Government. If the hon. Gentleman wishes to press any of his amendments to a vote, I will ask my hon. Friends to oppose them.

Howard Flight: The amendments were intended to highlight the complexity and potential problems of the extended reporting requirements, particularly for the subsidiaries of overseas multinational groups. The objective was to pressure the Government and the Revenue to agree a practical way of handling the extended reporting requirements, and to avoid potential non-compliance and unfair penalties in what are, broadly, unintended situations.
 I am glad that the Paymaster General was able to give an assurance that a straightforward procedure and guidelines will be issued by the Revenue. Again, our point is that the less complex the better, and the less costly the better. On that basis, I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Amendment made: No. 168, in 
schedule 22, page 262, line 42, leave out 
 'entitled to any beneficial interest in the' 
 and insert 
 'beneficially entitled to the employment-related'.—[Dawn Primarolo.]

Howard Flight: I beg to move amendment No. 32, in
schedule 22, page 263, line 41, at end insert— 
 '( ) Employment-related securities are not restricted securities or a restricted interest in securities by reason only that— 
 (a) the holder of those securities enters into an agreement not to dispose of them for a period of time following an admission to listing of securities on a recognised stock exchange; 
 (b) the holder of those securities enters into an agreement not to dispose of them for a period of time following the appointment of a person as a director of the issuer of the 
securities, at a time when its securities are listed on a recognised stock exchange; or 
 (c) the holder of the securities is prohibited from disposing of them by the operation of any securities or regulatory law or the provisions of any code governing securities transactions applying to the officers and employees of companies listed on any recognised stock exchange.'.

John McWilliam: With this it will be convenient to discuss amendment No. 33, in
schedule 22, page 263, line 41, at end insert— 
 '( ) Employment-related securities are not restricted securities or a restricted interest in securities if they are not listed on a recognised stock exchange and the articles of association of the issuer provide that— 
 (a) the holder will be required to offer for sale or transfer the employment-related securities on ceasing to be employed by the employer or a person connected with the employer; 
 (b) certain causes of cessation of such employment will mean that the holder receives an amount which is less than the market value of those securities at that time; 
 (c) such causes are stated in the articles of association, either directly or by implication by stating the causes of cessation of such employment for which the holder will receive market value for those securities; 
 (d) the identification of such causes is not dependent upon the discretion of the officers of the issuer but set out on objective grounds; and 
 (e) the holder will always be entitled on such sale or transfer to an amount at least equal to the market value of those securities on a cessation due to his death, disability, ill-health or retirement. 
 In this subsection ''articles of association'' means the constitutional documents of a company, notwithstanding their official designation in the jurisdiction in which the company is incorporated.'.

Howard Flight: This is an amendment by which we are again looking for a ministerial statement of interpretation. If that is not possible, we believe that we should press it to a vote. The amendments would prevent current stock exchange practices from having an adverse tax effect on employees of listed companies.
 There are some flaws in the Bill that could present commercial problems. For example, the restricted shares rules are designed to attack income that is camouflaged in the form of under-valued shares, but its wide-ranging drafting could expose to adverse tax treatment three categories of people: those who enter into a lock-in agreement on a flotation, which now is more or less a commercial requirement of sponsors; directors who agree to maintain a minimum shareholding in their listed companies, which everyone now agrees is a good thing; and employees who are prohibited from dealing in shares by the model code on insider dealing. It would make for better legislation specifically to exempt those categories. 
 Similarly, amendment No. 33 seeks a ministerial interpretation and statement. There is a problem with the restricted shares rules in the Bill. Commercially, an unlisted company will want to recover shares from departing employees and will not want to pay full value to a bad leaver. The old law allowed for that, but the new law omits it entirely. Unless that is rectified, unlisted companies that seek to give equity to employees could be hit hard.

[Mr. Chris Pond in the Chair]

Dawn Primarolo: Good afternoon, Mr. Pond. How nice to see you sitting there.
 I wish to respond to the points made by the hon. Member for Arundel and South Downs, and I hope that I will be able to show by my comments that his amendments are not needed. The new rules in chapter 2, which deal with restricted employment-related securities, are being introduced following representations from the share schemes industry to put the taxation of securities subject to restrictions on a fairer basis. They achieve that by taxing a reduced value at the time of award to reflect the effect of the restriction on the market value, and by taxing the remaining value obtained by reason of employment when those restrictions are lifted or varied. That ensures that the employee pays tax and national insurance contributions on the value received by reason of the employment. Any subsequent growth in value, on which income tax has been paid, is then not within the income tax regime.

[Mr. John McWilliam in the Chair]
 The type of restrictions depicted in the amendment may well be restrictions. However, there is a second criterion that also has to be met before securities carrying restrictions come within the new rules. That criterion is that the restrictions must reduce the value of the securities. If employee pre-emption rules are included in articles of association such that there is a restriction on the sale of the securities, and if that restriction affects the market value, the employee can elect, under the provision in chapter 2, to pay up front on the unrestricted value of the shares. If he does not make such an election, the default taxing position is as I have described. 
 When shares are exchanged for new shares following a takeover of a company and those new shares have restrictions on them, the employee will again have the opportunity to elect to pay up front on the full value ignoring the restrictions. When the market value of the shares exchanged is equal to the unrestricted value of the new shares received, such an election would prevent any further charge to income tax on the exchange of the shares. 
 I hope that those examples show that the rules work in a fair way in the scenarios on which the amendments focus, and that they show why the amendments are unnecessary. To summarise, by using the election facility, the employee would pay tax on the full value when the securities are acquired in exactly the same amount as would be the case were the amendments agreed. The amendments are unnecessary. Unfortunately, because of the way in which we and the Inland Revenue have constructed the schedule to deal with anti-avoidance, the amendments would introduce some avoidance opportunities, which I know full well the hon. Gentleman would not want. I hope that he will reflect on what I have said and withdraw his amendments.

Howard Flight: I think that the Paymaster General has persuaded me. I beg to ask leave to withdraw the amendment. However, I trust that the Revenue and
 the Government will satisfy themselves that the specific cases that I cited could not lead to unfair treatment.
 Amendment, by leave, withdrawn.

John McWilliam: Order. May I point out to the hon. Gentleman that the minute that he says that he begs to ask leave to withdraw the amendment, I am supposed to put the question? If he is going to do that again, please will he make his argument and then withdraw the amendment.
 Amendment made: No. 169, in 
schedule 22, page 265, line 3, leave out from 'is' to 'after' in line 5 and insert 
 'beneficially entitled to the employment related securities'.—[Dawn Primarolo.]

Howard Flight: I beg to move amendment No. 34, in
schedule 22, page 265, line 17, at end insert 
 'It shall not be regarded as a removal or variation of any restriction where, by the operation of law, another person is entitled to require the sale to him of the securities and exercises that entitlement.'.

John McWilliam: With this it will be convenient to discuss amendment No. 35, in
schedule 22, page 265, line 17, at end insert 
 'For the purposes of this Chapter there is not a variation of a restriction relating to any employment related securities if there is any variation in the rights attached to, or the issued number of, any other securities in the company in accordance with the terms of those other securities.'.

Howard Flight: This is a commercial amendment intended to clarify the meaning of restricted securities in order to give guidance to the investment industry. There could be a technical flaw in the drafting. The legislation will charge income tax on increases in value when restrictions on sale are lifted, including a premature acceleration. That is an innovation intended to catch awards of shares subject to initial restrictions to depress value. It seems a little harsh to charge tax on someone where the restriction falls away because a purchaser exercises his compulsory purchase rights under new section 428 after a takeover.
 On amendment No. 35, under the old law, the Inland Revenue issued a press release stating that negative ratchets, for example in management buy-outs, which diminished the value of investor shares in line with performance hence inflating the value of employee shares, were exempt from anti-avoidance provisions by Revenue practice. The amendment is intended to clarify that negative ratchets are equally protected under the new law. It would again be helpful if the Paymaster General could comment on that.

Dawn Primarolo: On amendment Nos. 32 and 33 I tried to explain the proposed new approach to the taxation of restricted securities. It would not be right to tax the whole value of restricted securities at acquisition, but tax should be payable when restrictions that affect the value of the securities are lifted or varied.
 Amendment No. 34 would exclude from the definition of the variation or removal of a restriction circumstances in which the employee is required to sell the securities by operation of the law. I presume that 
 that refers to bankruptcy or similar situations. Such an event leads to the sale of the employment-related securities, so is a chargeable event in its own right by virtue of another part of the taxing provision. The amendment would not therefore achieve the effect of removing the tax charge in those circumstances. 
 Moreover, if the sale of the securities, forced or otherwise, results in the employee receiving real value, it is right, and fully in line with the policy intention as I have explained it to the Committee, that there should be a charge on the value assessed at that time. 
 Amendment No. 35 is equally unnecessary. I do not believe that the variation of rights attaching to other securities is a variation of a restriction attaching to employment-related securities. That would mean that such an event would not trigger a chargeable event under chapter 2. If the variation or imposition of rights affecting other securities takes place for non-commercial purposes, the value manipulation anti-avoidance rules in chapters 3A and 3B come into play to counter that. Where tax charges are deferred, as they are in the new restricted securities regime, that could tempt avoiders to look for ways to avoid triggering the charge at the later time. Introducing specific exclusions, such as those in amendment No. 35, for no sound policy reason—which is shown by the examples that I have given—would unfortunately point such avoiders in a direction where they might find a rich vein of opportunity. 
 Amendment No. 35, like amendment No. 34, adds nothing to the working of chapter 2, but together they would add complexity and ambiguity that could be exploited. I hope that that gives the clarification that the hon. Gentleman seeks, and that he will withdraw the amendment. If not, we shall have to vote against it.

Howard Flight: From what the Paymaster General has said, I am satisfied that amendment No. 35 is not necessary. I am still not entirely clear what the tax situation would be in relation to the example that I cited under amendment No. 34. As I said up front, we are getting into a new regime of restricted securities, where there is considerable confusion even among experts. I should like the Paymaster General to say that the Revenue will issue a clear, practical definition of restricted securities in due course to help those poor devils who must operate this nightmarish, complex provision without too much expense.

Dawn Primarolo: On the hon. Gentleman's point about MBOs, I was trying to say that if value is received by reason of the employment, it would be taxed under the rules. That is clear.
 Turning to the advice, I am sure that if the Inland Revenue were called on to provide information it would do so, but I need to check whether it would be in the form of guidance. Perhaps the hon. Gentleman would allow me to come back to him on that.

Howard Flight: On that basis, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Dawn Primarolo: I beg to move amendment No. 170, in
schedule 22, page 265, line 24, leave out from 'restrictions' to end of line 29.

John McWilliam: With this it will be convenient to discuss Government amendment No. 173.

Dawn Primarolo: Since publication of the Bill, we have received helpful representations from a share scheme practitioner suggesting that the wording of one of the subsections designed to provide relief does not work properly. Inland Revenue officials have considered the matter and agree that a minor error would result in the employee being taxed on the wrong amount if a restricted security were sold to an unconnected person for less than its market value. The new subsection that the amendment introduces would reduce the amount that would otherwise be taxed to take account of the lower proceeds. It does so by applying a final reduction factor to the taxable amount. The factor is the reduced sale proceeds divided by the market value of the securities.
 I do not know the name of the practitioner who pointed out the problem, but I am extremely grateful to that person. 
 Amendment agreed to.

Howard Flight: I beg to move amendment No. 114, in
schedule 22, page 265, line 38, leave out 'PCP' and insert 'PPCP'.

John McWilliam: With this it will be convenient to discuss the following:
 Amendment No. 115, in 
schedule 22, page 265, line 41, after 'securities', insert 
 'and PPCP is the result derived for PCP on a previous application of the formula'.

Howard Flight: The formula in new section 428 is welcome because it seeks to charge the proportion of the security remaining untaxed after acquisition. The Law Society argues that the formula may not operate wholly as intended if the initial unrestricted market value is high and later drops on sale. The charge seems to be calculated by reference to the former amount and not to the actual profit realised. The society cited a calculation: if the initial unrestricted value were £100, the price paid, subject to restriction, £80 and the sale price £90, that would deliver a figure of £18 and the profit would be £10. The problem with the definition of PCP could usefully be clarified by stating that on the first occasion it is nil, on the second it is IUP-OP and on the third it is IUP-PCP-OP. The appearance of PCP twice in new subsection 428(5) is somewhat confusing. Amendments Nos. 114 and 115 address both those points.

Dawn Primarolo: The Law Society's previous criticism was that the Government were making the legislation more complex. Now they want to add another acronym to the formula for calculating the tax charge relating to restricted employment-related securities, which would not alter the way in which the formula works. I was sorely tempted to say that, although it would add nothing and would change nothing, except that it would put in the Bill something totally irrelevant that does not need to be there, I would accept the amendment if it made the hon.
 Gentleman happy. However, I have decided that it would be foolhardy for a Minister to proceed in that way. Is the hon. Gentleman seriously asking me to add to the Bill for no improvement or change in the formula?

Howard Flight: I think that the Paymaster General has missed the point. All that we wanted was a statement from her that what we regard as an unfair result is not intended. The Law Society felt that this problem could arise, because the definitions were not specific enough.

George Osborne: Our argument seems to illustrate the general point that it is extremely unhelpful to use these acronyms in the Bill. The definitions exist only in the explanatory notes. It would make for better and more user-friendly legislation if, say, UMV were spelt out as unrestricted market value.

Howard Flight: My hon. Friend makes precisely the point. I simply seek the Paymaster General's confirmation that the Law Society's possible interpretation is not correct.

Dawn Primarolo: I do not wish to cause any offence to the Law Society, but the current formula provides the intended result. To add another acronym would not add clarification. I confirm that the interpretation is as I have explained it. On this occasion the Law Society is not quite right.

Howard Flight: The term has to be distinguished. I think that the Paymaster General has given me the satisfaction that I sought, so I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Dawn Primarolo: I beg to move amendment No. 171, in
schedule 22, page 266, line 27, at end insert— 
 '( ) if the employment-related securities were acquired on a conversion of other employment-related securities, any amount that counted as employment income of the employee under Chapter 3 of this Part (including that Chapter as originally enacted) (convertible securities) by reason of the conversion,'.

John McWilliam: With this it will be convenient to discuss the following:
 Government amendment No. 172. 
 Amendment No. 36, in 
schedule 22, page 266, line 32, after 'outstanding', insert— 
 '( ) any amount treated as employment income in respect of the employment-related securities under Chapters 3, 3A or 3B of this Part'.

Dawn Primarolo: The schedule introduces a new chapter 2 into part 7 of the Income Tax (Earnings and Pensions) Act 2003, which is designed to put taxation of employment-related securities on a fairer basis, subject to restrictions. It achieves that by taxing as income a reduced value at the time of the award to reflect the effect of the restrictions on the market value, and by taxing as income the remaining value obtained by reason of the employment when the restrictions are lifted or varied. Once the value has been subject to income tax, any market growth in it is within the scope of capital gains tax.
 The value remaining to be taxed is arrived at by deducting from the initial unrestricted market value of the securities certain deductible amounts and expressing the result as a decimal proportion. The deductible amounts are consideration paid, and the amount on which tax was payable at acquisition of the restricted security. 
 The wording of new section 428(8)(d) provides for a deduction of amounts taxable under chapter 3C. As such charges are not relevant to the main calculation, that would give the wrong result. Opposition amendment No. 36 has identified the problem, but unfortunately its suggested solution is flawed, as it would allow additional deductible amounts arising from charges under chapters 3A and 3B. 
 We have tabled the amendments to correct that position. We were unable to support amendment No. 36 because of the difficulties that I have just explained, and Government amendments Nos. 171 and 172 make the right correction in removing the incorrect reference to chapter 3C and replacing it with the correct reference to chapter 3. We would count that as a score draw. The hon. Member for Arundel and South Downs has tabled a similar amendment, but it is the advantage of having parliamentary counsel that ensures that my amendments are correctly drafted, and that is the difference between being in opposition and being in government. I would say to the hon. Gentleman that perhaps we could share the amendment.

Howard Flight: We are pleased that Government amendments Nos. 171 and 172 address the problem of the risk of double taxation, which we have highlighted, and we are pleased to support them.
 Amendment agreed to. 
 Amendments made: No. 172, in 
schedule 22, page 266, line 28, leave out from beginning to ', and' in line 32.
 No. 173, in 
schedule 22, page 266, line 41, at end insert— 
 '( ) Where the chargeable event is one within section 427(3)(c) (disposal) and CD is less than AMV, the taxable amount for the purposes of section 426 is the amount determined under subsection (1) multiplied by— 
 CD 
 AMV 
 where— 
 CD is the consideration given for the employment-related securities, and 
 AMV is the actual market value of the employment-related securities immediately after the chargeable event.'.—[Dawn Primarolo.]

Howard Flight: I beg to move amendment No. 38, in
schedule 22, page 267, line 44, after 'elect', insert 'at any time'.

John McWilliam: With this it will be convenient to discuss the following:
 Amendment No. 39, in 
schedule 22, page 267, leave out lines 45 to 47 and insert— 
 '( ) there shall be a charge to income tax on the untaxed proportion of the market value of any restricted securities or restricted interest in securities, ignoring the effect at that time of any restrictions, and'.
 Amendment No. 40, in 
schedule 22, page 268, leave out lines 10 and 11 and insert— 
 '( ) may require the taxable income to be calculated by reference to a date not more than 14 days prior to the date of the election'.
 Amendment No. 41, in 
schedule 22, page 268, line 13, leave out from beginning to end of line 4 on page 269.

Howard Flight: These four amendments all focus on the same point. The structure for restricted shares in the Bill will drag out tax charges on slices of the equity value until restrictions have been lifted in full. The Bill provides for two elections for employee and employer jointly. The shares can either be taxed in full on acquisition or the remainder of the tax charges can be accelerated on one of the catch-up charges. In both cases, there is a 14-day window in which to make the election—a process based on a United States provision. The linked amendments would simplify that process by holding both elections together and allowing an election to be made at any time.

Dawn Primarolo: At first sight the amendments might appear attractive, because they seem to simplify the rules by allowing an election to be made at any time. In reality the result would remove flexibility. More importantly, it would provide tax avoidance opportunities, because the employee and employer could use 14 days' hindsight when deciding whether or not to elect. The amendment would open an easy-to-use tax and national insurance avoidance route.
 If the amendments were adopted, all the employer and employee would need to do would be to wait for the market value of the securities to increase, perhaps after a floatation had been announced, then elect to pay tax on the lower value of those securities 14 days earlier. I am sure that that is not what Opposition Members imagined the effect would be when they tabled the amendments, but that would be the outcome. 
 The election facility in chapter 2 works. It provides maximum flexibility to employers and employees to allow them to plan when to settle final tax and national insurance contributions in relation to restrictive employment-related securities, and does not open up opportunities for avoidance as the amendments would, so I urge my hon. Friends to reject the amendment if it is put to the vote.

Howard Flight: I understand the Paymaster General's point, and I rather feared she might make it. There is criticism of the 14-day period, which Government amendment No. 174 deals with in relation to the period until Royal Assent. I still think that a 14-day period is limited, but on the basis of the Paymaster General's response I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Dawn Primarolo: I beg to move amendment No. 174, in
schedule 22, page 270, line 3, at end insert— 
 '(3) Section 431 has effect in relation to securities, or interests in 
securities, acquired before the day appointed under subparagraph (2)— 
 (a) with the substitution in subsections (1)(b) and (2)(b) for ''sections 425 to 430'' of ''section 426 as originally enacted and sections 426 to 430 as substituted by paragraph 3(1) of Schedule 22 to the Finance Act 2003'', and 
 (b) with the substitution in subsection (5)(b) for ''the acquisition'' of ''the day appointed under paragraph 3(2) of Schedule 22 to the Finance Act 2003''. 
 (4) But subparagraph (3) does not apply where in relation to the securities or interest in securities an amount counts as employment income of the employee under section 427 or 449 of the Income Tax (Earnings and Pensions) Act 2003 (c.1) as originally enacted.'.
 Since the publication of the Bill, we have received a number of representations saying that the inability to make an election in the short period to which the hon. Member for Arundel and South Downs referred in discussing the previous amendment is hampering the operation of genuine employee share schemes, particularly in the cases of company flotation, takeover and management buy-out. The industry has provided evidence of the number of cases and employees involved and of the value of shares currently affected. 
 I am therefore content to introduce an election facility for that short period. The employee will have until 14 days after the appointed day to make an election in respect of shares acquired during the period. The cost will be small and the facility should be widely welcomed. The election must be made in a form approved by the Inland Revenue, which will publish a draft form for election for comments next month. It will then publish a final version to take account of comments received immediately after Royal Assent. 
 Amendment agreed to.

Dawn Primarolo: I beg to move amendment No. 175, in
schedule 22, page 270, line 18, leave out 'or'.

John McWilliam: With this it will be convenient to discuss Government amendment No. 176.

Dawn Primarolo: Since the publication of the Bill we have also become aware of a potential weakness in the new definition of convertible securities. It has been suggested that the rules would not apply where securities convert automatically into securities of another description. The amendment puts it beyond doubt that the new chapter 3 rules also apply to securities that convert automatically.
 Amendment agreed to. 
 Amendments made: No. 176, in 
schedule 22, page 270, line 22, at end insert 
 'or 
 ( ) a contract, agreement, arrangement or condition makes provision for the conversion of the securities (otherwise than by the holder) into securities of a different description.'.
 No. 177, in 
schedule 22, page 271, line 18, leave out from 'is' to 'are' in line 20 and insert 
 'beneficially entitled to the securities into which the employment-related securities'.
 No. 178, in 
schedule 22, page 271, line 29, leave out from beginning to ', and' in line 30.—[Dawn Primarolo.]

Howard Flight: I beg to move amendment No. 42, in
schedule 22, page 271, line 38, at end insert— 
 '( ) The conversion of any non-employment-related securities in a company in accordance with the terms of those securities does not give rise to a chargeable event under this Chapter.'.

John McWilliam: With this it will be convenient to discuss the following:
 Amendment No. 43, in 
schedule 22, page 273, line 6, leave out 'if (and only if)' and insert 
 'of an amount equal to NCMV plus the amount (if any) by which'.

Howard Flight: Under the old law, the Inland Revenue issued press releases called negative ratchets in, for example, management buy-out situations to diminish the value of investor shares in line with performance and to inflate the value of employee shares, which were exempt by Inland Revenue practice from anti-avoidance provisions. The amendment is intended to clarify that negative ratchets are equally protected in such situations under the new law. Can the Paymaster General confirm that explicitly for the record? Otherwise there is the prospect, particularly in the situation about which I am about to speak, of double taxation.
 Amendment No. 43 covers convertible shares. In essence, when convertible shares convert into something worth having, the gain is taxed as though it were a normal share option. There is a risk of over-taxation in the original drafting. The Bill is designed to give credit against income tax on the gain on conversion for any money paid by the employee in excess of the initial value of the shares, but it does not appear to give credit to the initial value on which income tax must be paid on acquisition. The amendment is designed to correct that oversight, but I would be grateful if the Paymaster General were to confirm how the original clause is meant to work and that what we see as a potential problem does not exist.

Dawn Primarolo: Amendment No. 42 is unnecessary because securities that are not employment related are already exempted from the charging provisions in chapter 3 and, indeed, from other charges in part 7. The very first section in chapter 1, which sets out definitions, makes it clear that part 7 applies only if securities are acquired in connection with an employment.
 Amendment No. 43 seeks to allow a deduction equal to the market value of convertible securities at the time that they were first acquired in the calculation of the chapter 3 charge when those securities ultimately convert. I can only assume that it is based on a misunderstanding of how chapter 3 works because, if accepted, the amendment would result in the same amount being deducted twice—a result that I believe the hon. Gentleman does not intend. 
 Chapter 3 works by treating convertible employment-related securities as two assets: the underlying security—for example, a loan note—which is taxed as though it were not convertible when it is acquired, and the right to convert into a 
 new security, such as a share, at a later date, which is taxable under chapter 3. The rule that the amendment seeks to change provides relief in respect of the consideration paid by the employee for the convertible securities that was not relieved when calculating the taxable amount at the time; generally, that is likely to be amounts paid that related to the right to convert rather than to the underlying security. 
 The hon. Gentleman asked whether negative ratchets were excluded. When the chapter 3 charge is calculated, relief is given for the full market value of the security that is being converted. That of course includes anything originally paid for it. If value is received by reason of employment, clearly it should be taxed. Allowing the amendment would mean that the amount paid for the original security would be relieved twice. Therefore, the amendments are unnecessary, and I ask the hon. Gentleman to withdraw them.

Howard Flight: I thank the Paymaster General for her response on amendment No. 43, which clarifies that double taxation is not a possibility. I take it from her response on amendment No. 42 that, for example, a management buy-out would not be caught by the legislation. If that is the case, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Howard Flight: I beg to move amendment No. 45, in
schedule 22, page 275, line 22, at end insert— 
 '( ) The following provisions shall have effect where in pursuance of this section a person furnishes to the Inland Revenue particulars of things done or to be done by him, that is to say— 
 (a) if the Inland Revenue are of opinion that the particulars, or any further information furnished in pursuance of this paragraph, are not sufficient for the purposes of this section, they shall within 30 days of the receipt thereof notify to that person what further information they require for those purposes, and unless that further information is furnished to the Inland Revenue within 30 days from the notification, or such further time as the Inland Revenue may allow, they shall not be required to proceed further under this section; 
 (b) subject to paragraph (a) above, the Inland Revenue shall within 30 days of the receipt of the particulars, or, where that paragraph has effect, of all further information required, notify that person whether or not they are satisfied that the things as described in the particulars were or will be treated as done for genuine commercial purposes; 
 and, subject to the following provisions of this section, if the Inland Revenue notify him that they are so satisfied, the things which are the subject of the application shall be deemed to have been done for genuine commercial purposes. 
 ( ) If the particulars, and any further information given under this section with respect to any transaction or transactions, are not such as to make full and accurate disclosure of all facts and considerations relating thereto which are material to be known to the Inland Revenue, any clearance given by them under this section shall be void. 
 ( ) In no event shall the giving of a clearance under this section with respect to any transaction or transactions prevent this section applying to a person in respect of transactions which include that transaction or all or some of those transactions and also include another transaction or other transactions.'.

John McWilliam: With this it will be convenient to discuss the following:
 Amendment No. 54, in 
schedule 22, page 280, line 22, at end insert— 
 '( ) The following provisions shall have effect where in pursuance of this section a person furnishes to the Inland Revenue particulars of things done or to be done by him, that is to say— 
 (a) if the Inland Revenue are of opinion that the particulars, or any further information furnished in pursuance of this paragraph, are not sufficient for the purposes of this section, they shall within 30 days of the receipt thereof notify to that person what further information they require for those purposes, and unless that further information is furnished to the Inland Revenue within 30 days from the notification, or such further time as the Inland Revenue may allow, they shall not be required to proceed further under this section; 
 (b) subject to paragraph (a) above, the Inland Revenue shall within 30 days of the receipt of the particulars, or, where that paragraph has effect, of all further information required, notify that person whether or not they are satisfied that the things as described in the particulars were or will be treated as done for genuine commercial purposes; 
 and, subject to the following provisions of this section, if the Inland Revenue notify him that they are so satisfied, the things which are the subject of the application shall be deemed to have been done for genuine commercial purposes. 
 ( ) If the particulars, and any further information given under this section with respect to any transaction or transactions, are not such as to make full and accurate disclosure of all facts and considerations relating thereto which are material to be known to the Inland Revenue, any clearance given by them under this section shall be void. 
 ( ) In no event shall the giving of a clearance under this section with respect to any transaction or transactions prevent this section applying to a person in respect of transactions which include that transaction or all or some of those transactions and also include another transaction or other transactions.'.
 Amendment No. 59, in 
schedule 22, page 295, line 39, at end insert— 
 '( ) The following provisions shall have effect where in pursuance of this section a person furnishes to the Inland Revenue particulars of things done or to be done by him, that is to say— 
 (a) if the Inland Revenue are of opinion that the particulars, or any further information furnished in pursuance of this paragraph, are not sufficient for the purposes of this section, they shall within 30 days of the receipt thereof notify to that person what further information they require for those purposes, and unless that further information is furnished to the Inland Revenue within 30 days from the notification, or such further time as the Inland Revenue may allow, they shall not be required to proceed further under this section; 
 (b) subject to paragraph (a) above, the Inland Revenue shall within 30 days of the receipt of the particulars, or, where that paragraph has effect, of all further information required, notify that person whether or not they are satisfied that the things as described in the particulars were or will be treated as done for genuine commercial purposes; 
 and, subject to the following provisions of this section, if the Inland Revenue notify him that they are so satisfied, the things which are the subject of the application shall be deemed to have been done for genuine commercial purposes. 
 ( ) If the particulars, and any further information given under this section with respect to any transaction or transactions, are not such as to make full and accurate disclosure of all facts and considerations relating thereto which are material to be known to the Inland Revenue, any clearance given by them under this section shall be void. 
 ( ) In no event shall the giving of a clearance under this section with respect to any transaction or transactions prevent this section applying to a person in respect of transactions which include that transaction or all or some of those transactions and also include another transaction or other transactions.'.

Howard Flight: These amendments are commercial amendments, designed to provide for a clearance procedure for advisers and companies on what is a very open-ended and unclear provision. In view of the complexity, the provision is unworkable unless there is a clearance procedure.

Dawn Primarolo: I ask the Committee to resist the amendments, which, as the hon. Gentleman says, seek to introduce a clearance facility if transactions that might be considered to be non-commercial are contemplated. The anti-avoidance provisions have been introduced to discourage non-commercial transactions that manipulate the value of company shares. If companies are carrying out their normal commercial transactions, they will not be affected by the provisions and should have no need for a clearance provision to confirm that to them.
 The anti-avoidance legislation on manipulation of share valuations on which the legislation is built was introduced in the Finance Act 1988. At that time, the responsibility for considering whether intra-group transactions had increased the value of the company whose shares were used was placed, badly, with the directors and auditors. Under the principles of self-assessment, it is for the company to establish its purpose in carrying out a transaction. If a company wants assurance on that point, it can discuss the matter with its auditors. If an auditor were to sign a certificate confirming that a transaction had been carried out for commercial reasons, that would be good evidence to present to the Inland Revenue. The amendments would place an unnecessary administrative burden on industry and the Inland Revenue for no obvious gain. Therefore, I ask my hon. Friends to oppose the amendments.

Howard Flight: As all parties are aware, this is a Bill of great complexity. It is unreasonable that medium-sized companies particularly should have to wade through with complete understanding in bona fide situations. We believe that it is appropriate for Governments who wish to introduce such legislation to provide clearance procedures. We therefore wish to press the amendment to the vote.

Michael Jack: In the light of what my hon. Friend has said, I hope that we will be able to persuade the Paymaster General to remind the Committee about the Revenue's advice, because my memory is failing. The measures proposed in amendment No. 45 seem to have parallels with other activities where the Revenue has to give an opinion about a company's activities involving its shares. I believe that it is section 807 or 307. I may have got that wrong, but buried in my memory bank is something that says that the Revenue must give approval where a company does certain things with its shares. I sense from what my hon. Friend says that there is a flavour of that in amendment No. 45. Will the Paymaster General refresh my memory about the advice that the Revenue can currently give companies when they have to make changes to the share capital?

Dawn Primarolo: There is a difference between a discussion with the Inland Revenue, in which companies can seek advice and clarification on the operation of the legislation, and a formal proposal for
 a clearance procedure, currently known as a general anti-avoidance procedure—a GAA. The amendment seeks a general clearance. That is different from the day-to-day discussions that the Revenue would have across the piece with taxpayers about the interpretation of tax law and therefore what they should do and what their responsibilities and obligations are.
 Question put, That the amendment be made:—
The Committee divided: Ayes 6, Noes 15.

Question accordingly negatived.

Howard Flight: I beg to move amendment No. 47, in
schedule 22, page 276, leave out lines 42 to 44.

John McWilliam: With this it will be convenient to discuss the following:
 Amendment No. 48, in 
schedule 22, page 276, line 44, leave out from ', securities) or' to the end of line 1 on page 277.
 Amendment No. 49, in 
schedule 22, page 277, line 6, leave out 
 'In a case within subsection (1)(a),'.
 Amendment No. 50, in 
schedule 22, page 277, leave out lines 12 to 15.
 Amendment No. 51, in 
schedule 22, page 277, line 17, leave out 
 '(a) In a case within subsection (1)(a),'.
 Amendment No. 52, in 
schedule 22, page 277, leave out line 19.
 Amendment No. 53, in 
schedule 22, page 277, leave out lines 20 to 23.

Howard Flight: Amendments Nos. to 52 cover the same territory. They attempt to simplify excessive anti-avoidance provisions that, in effect, require annual share valuations to check whether a tax charge has been triggered, and would replace that with a valuation after disposal. In our view, the requirement to have an annual evaluation is unworkably burdensome in a purportedly simplifying Bill. The amendment replaces the annual evaluation check with a once-only review of the year prior to an event that would create a tax charge under other parts of the Bill. It is unlikely that an employer could or would plan an artificial value shift more than 12 months in advance.
 Amendment No. 53 relates to the measure that requires valuation checks on shares to see whether 
 non-commercial matters have artificially depressed share value in the case of a restricted share not subject to a tax on acquisition because it is potentially forfeitable within seven years. The review period is extended back seven years before acquisition, creating the prospect of a potential 12-year review period. The amendment would cut out the review period extension, leaving a standard flat period for all awards covered by the measure.

Dawn Primarolo: I urge the Committee to resist the amendments, which seek to remove two important anti-avoidance provisions within the new anti-avoidance chapter 3A. That provision works by modifying the market value of employment-related securities to take account of any artificial reduction in the value when applying the formula when restrictions are lifted or varied. That can occur in two ways. Either a restriction is really lifted, in which case the formula would be applied anyway, or if the restrictions are themselves artificial, a charge is imposed at 5 April, following the artificial value reduction by deeming any remaining restrictions to have been lifted. The reason for the latter provision is to ensure that the amount of the artificial reduction in value is taxed, even if there is no intention of ever lifting or varying restrictions.
 However, some respondents appear to have misunderstood the way in which this anti-avoidance rule works, and have concluded that it imposes an annual charge at 5 April. That is misguided, because once the provision has applied, the securities will no longer be restricted securities for the purposes of part 7 of the Income Tax (Earnings and Pensions) Act 2003, which means that the provision will no longer be applicable. The amendments have perhaps been tabled as a result of that misinterpretation, because I cannot imagine that the intention would be to reopen the inevitable avoidance opportunity. 
 Amendments Nos. 47 to 52 seek to remove the provision that imposes a tax charge at 5 April in its entirety. Amendment No. 53 seeks to disapply the provision in its rewritten form if a charge has not arisen over a period of seven years. The amendments' inevitable effect would be to provide the opportunity to impose artificial restrictions on securities that severely impact on their value. The value would then be artificially reduced using a non-commercial transaction. The restriction would remain in place for more than seven years. The result would be that the amount by which the value of the securities was artificially depressed would escape income tax and national insurance. As hon. Members know, the purpose of the schedule is to ensure that the proper income tax and national insurance are paid, so I ask them to oppose the amendments if they are pressed to a vote.

Howard Flight: The Paymaster General has answered the point raised by the first amendment but, as she is aware, such is the complex and incomprehensible drafting that most of the industry had thought that annual valuations were required. I am very glad to hear that they are not. I think that we have a point with amendment No. 53, which is about impossible complexity, but I shall not press it to a vote.
 I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn.

Dawn Primarolo: I beg to move amendment No. 179, in
schedule 22, page 277, line 33, leave out '2002' and insert '2003'.
 The amendment corrects an error in schedule 22(5) that has resulted in a date being incorrectly printed as 16 April 2002 instead of 16 April 2003, which makes quite a difference—putting it mildly. That was a typographical error, but because the effect changes the meaning of the section, a Government amendment is required to make the change. I hope that the Committee will agree, and that my hon. Friends will support the amendment. 
 Amendment agreed to.

Howard Flight: I beg to move amendment No. 55, in
schedule 22, page 281, line 14, at end insert 
 'For the purposes of this Chapter there is not a non-commercial increase in the value of any employment-related securities if there is any variation in the rights attached to, or the issued number of, any other securities in the company in accordance with the terms of those other securities.'.

John McWilliam: With this it will be convenient to discuss amendment No. 56, in
schedule 22, page 282, leave out lines 21 to 36 and insert— 
 '( ) The relevant period begins on the earliest of: 
 (a) the date of the acquisition of the employment-related securities; and 
 (b) the 6th April preceding the date on which this Chapter ceases to apply to the employment-related securities.'.

Howard Flight: The current draft assumes that there will be annual valuations of shares to check whether or not there has been a non-commercial inflation of the value, and if so, to charge it to income tax. That appears unworkably burdensome in a purportedly simplifying Bill, and the amendment would replace the annual valuation check with a once-only review.

Dawn Primarolo: Amendment No. 55 would introduce a rule that excludes from the operation of chapter 3B any increase in value that results from the variation or imposition of rights affecting other securities, thus weakening the effect of the chapter by introducing the very avoidance opportunity that the existing rules counter. There is no reason at all to single out transactions of that nature and exclude them. Such transactions and their effect on the value of the employment-related securities should be considered in exactly the same manner as other transactions. It is right that the test should be whether the transactions leading to the increase in value are non-commercial.
 Amendment No. 56 appears to seek to change the period to be considered when applying a 10 per cent. increase test in chapter 3B, to which I referred earlier. Its purpose is difficult to understand, but the amendment would have the effect of removing the existing requirement to look at a whole tax year to 5April or, if shorter, the actual period of ownership of the securities, and replacing it with a period that starts but never ends, or one that starts before the securities are acquired. That would clearly be absurd. The Committee will not be surprised that I am not 
 attracted to the amendments, and I ask hon. Members to reject the amendment if it is pressed to a vote.

Howard Flight: I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Howard Flight: I beg to move amendment No. 57, in
schedule 22, page 283, line 39, after 'applies', insert 
 'to an employee who earns more than £8,500, or holds office as a director of a company, during a tax year'.
 The provisions on which this part of the schedule are based—formerly section 162 of the Income and Corporation Tax Act 1988—were originally confined to higher-paid employees. That restriction has been removed by placing the charging provision in with the others. It seems unlikely that they would ever be caught, but it is perhaps worth making the point that the Government have extended one of their anti-avoidance measures not to high-paid employees, but to the poor.

Dawn Primarolo: I am sure that the intention of those tabling the amendment is, as the hon. Gentleman said, the protection of lower-paid employees. The amendment would re-introduce one of the avoidance opportunities that schedule 22 is designed to eliminate. New Chapters 1 to 5 will apply uniformly to employees, directors and other office holders such as company secretaries, but the amendment would limit the application of Chapter 3C only to some employees and directors. Office holders would be specifically excluded from the charge, regardless of their income. There is absolutely no reason for that.
 In fact, it was the existence of that exclusion of office holders that led an accountant to suggest in a telephone conversation that had he known about the loophole, he would have had a field day. Unfortunately for him, we have closed it. I urge my hon. Friends to reject the amendment.

Howard Flight: We understand the Government's objectives. It is unfortunate that, as a result of their zeal, the innocent, less well paid will suffer bureaucracy. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Amendment made: No. 180, in 
schedule 22, page 288, line 3, leave out 
 'entitled to a beneficial interest in' 
 and insert 'beneficially entitled to'.—[Dawn Primarolo.]

Howard Flight: I beg to move amendment No. 116, in
schedule 22, page 295, line 1, leave out from first 'the' to 'at' and insert 
 'net amount which the person who acquires the securities might reasonably expect to realise on a disposal of them'.
 The new law potentially increases the amount of taxable gain on the exercise of a share option by using the capital gains tax measure of market value, which is an open valuation and ignores the offset of private restrictions, and by ignoring disposal costs on the shares. The amendment is intended to return the law to the old arrangements.

Dawn Primarolo: I ask my hon. Friends to oppose the amendment. It would confuse the taxpayer and add burdens. The schedule introduces a new definition of market value throughout part 7, adding clarity and consistency. Market value now has the same meaning as that used for capital gains tax purposes and for the new corporation tax relief for employee share acquisitions in schedule 23. The amendment is intended to reverse the change, but only for the purposes of employment-related securities options in chapter 5. Moving to a consistent definition for income tax, capitals gains tax and the new corporation tax deduction for employee share acquisitions will make valuations simpler and more straightforward.

Howard Flight: The reality is that this is another stealth tax that changes the valuation basis for option gains to increases, hidden away in an anti-avoidance measure. It is not material, but it is important that people realise the extent to which the Bill is laced with such stealth taxes. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Amendment made: No. 181, in 
schedule 22, page 301, line 22, after 'affect' insert 
 'the operation of section 698 as originally enacted in relation to'.—[Dawn Primarolo.]

Howard Flight: I beg to move amendment No. 117, in
schedule 22, page 302, line 20, leave out from beginning to end of line 3 on page 303.

John McWilliam: With this it will be convenient to discuss amendment No. 118, in
schedule 22, page 303, leave out lines 10 to 13.

Howard Flight: The amendments are intended to overturn the extension of PAYE and NICs to shares not eligible for the new corporation tax relief in schedule 23. That would include unlisted shares in subsidiaries in venture capital-backed situations. It is unreasonable to tax such shares on the same footing as listed shares. It may be argued that my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) was keen to extend PAYE to the taxation of bonuses and matters relating to listed shares, but the situation is not the same in relation to unlisted companies.

Dawn Primarolo: I ask my colleagues to oppose the amendments. The term ''readily convertible assets'' is used throughout the Income Tax (Earnings and Pensions) Act 2003 and determines, among other things, whether the employer is required to operate PAYE in respect of the employee's earnings from employment. There is no policy reason why the amount of national insurance contributions payable on earnings arising from employment-related securities should be different simply because they do or do not carry a label of ''readily convertible asset''. We are determined to stop the exploitation of readily convertible assets by those intent on avoiding their national insurance and income tax.

Howard Flight: The amendment is designed to overturn a wide extension of the PAYE net to which we object. The Minister's statement has not responded to the issues that I raised, so we shall press the amendment to
 a vote and look to the Government to resolve in due course the issues that we have raised.
 Question put, That the amendment be made:—
The Committee divided: Ayes 6, Noes 14.

Question accordingly negatived. 
 It being Five o'clock, The Chairman proceeded, pursuant to Sessional Order C [28 June 2001] and the Order of the Committee [15 May 2003], to put forthwith the Questions necessary to dispose of the business to be concluded at that time. Amendments made: No. 182, in 
schedule 22, page 302, line 39, leave out 
 'have a beneficial interest in' 
 and insert 'be beneficially entitled to'.
 No. 183, in 
schedule 22, page 302, line 42, leave out from 'shares' to 'constitute' in line 43 and insert 
 'to which the person ceases to be beneficially entitled'.—[Dawn Primarolo.]
 Schedule 22, as amended, agreed to.

Gerry Sutcliffe: I beg to move, That further consideration be now adjourned.
 I wish everyone a good recess

David Wilshire: I am aware that it would be deeply unpopular with Labour Members, let alone with you, Mr. McWilliam, and everyone else if we debated the adjournment motion at length when we are so close to going home for a week or so. I do not intend to launch into a long debate, but a couple of serious points need to be made.
 You were fortunate, Mr. McWilliam, to miss the hiccup on Tuesday evening. I hope that my right hon. and hon. Friends have today demonstrated that we are prepared to co-operate. The price for that this afternoon has been to gallop through a whole range of issues to which I honestly believe we could have done greater justice if Members had felt less constrained because of the 5 o'clock guillotine. I simply want to reiterate that we still believe that not enough time has been allowed. The usual channels have offered an extra sitting, for which I am grateful. However, having got that far in thinking carefully about the future, we should consider between now and when we sit again whether, with an extra sitting, the knives are in the right place. I am willing to have such a discussion, and I hope that if you are approached with a unanimous request for a meeting of the Programming Sub-Committee when we reconvene, Mr. McWilliam, you will be willing to consider it, in 
 spite of the fact that appropriate notice may not have been given. 
 Having made those points, I wish everyone a good break.

John McWilliam: May I, too, wish the Committee and the staff a well-earned and enjoyable break? This is
 always a gruelling Committee, although others are just as gruelling.
 Question put and agreed to. 
 Adjourned accordingly at four minutes past Five o'clock till Tuesday 3 June at half-past Ten o'clock.